Millennials Are Pushing Cap Rates to Record Lows

LOS ANGELES—Cap rates are hitting all-time lows. According to a new study from CBRE, millennials and baby boomers, paired with strong economic fundamentals, are driving multifamily cap rates down across the country with Los Angeles and San Francisco reporting the lowest averages. In the first half of 2016, the two cities had a 3.75% average multifamily cap rate, while San Jose, San Diego, Orange County and New York had cap rates averaging below 4%. To find out more about this downward trend, we sat down with Priscilla Nee, SVP at CBRE, for an exclusive interview.

GlobeSt.com: How are millennials and baby boomers playing a role in these record low cap rates? 

Priscilla Nee: Millennials are fueling the rent premium differential between renovated and non-renovated product.  Investors looking to capitalize on this understand that there is easily a minimum bump of 15%-20% on nicely renovated units.  This takes the attention away from the currently low cap rates, and places an emphasis, instead, on the post renovation, stabilized, yield.

GlobeSt.com: While cap rates are hitting record lows nationwide, why are Los Angeles and San Francisco seeing exceptionally low cap rates?

Nee: Risk versus reward, coupled with supply and demand.  Unless we run out of water, people want to be in California, especially the Los Angeles and San Francisco markets. The increasing number of tech jobs, the large and highly educated workforce and the density of Millennials congregating in a city such as LA is making already historically lower cap rate regions even more expensive.

GlobeSt.com: How are these record low cap rates affecting investors, especially buyers, in the L.A. and SF submarkets?

Nee: Most buyers are priced out of the market. Those who want to be competitive have had to redefine their investment parameters and concede to a lower preliminary yield.  It's definitely more challenging for the investors who don't understand, or believe in, the power of pushing rents to accept, so they end up on the sidelines.

GlobeSt.com: Can or will cap rates continue to decrease? What is your forecast?

Nee: Yes, I believe so, because the investors who are winning the deals today are looking more at stabilized yields than current cap rates.  As long as rents continue to increase, and money continues to be cheap and easily accessible, cap rates can continue to compress.  Furthermore, there has been an unprecedented influx of foreign capital flowing into the U.S., with more than $125 billion across all product types from 2015 through the end of the second quarter this year.  According to the latest CBRE research, the LA market has captured a significant amount of foreign capital, with more than 80 percent of cross-border capital flows into LA originating from Asia and the Middle East.  Our Global Investor Intentions Survey indicated that 82 percent of global investors plan on investing either the same or more in the coming years.  If you compare our low cap rates to the yields these foreign buyers are seeing at home in the same product type, our low cap rates and security are actually quite attractive.

GlobeSt.com: What is your advice to investors who are playing in this market? What are the benefits and the challenges of having cap rates this low?

Nee: Don't sweat the small stuff if you're buying location, especially if you're a long-term holder.  Get aggressive on your terms, shorten your due diligence period if you can do so without compromising your inspections,  make sure you're on the radar of the active agents in the markets you want to be if you're a buyer.  Go to market, if you're a seller.  The challenge is that deals don't make sense to most people, and low loan-to-value parameters require more capital to get into a deal, although there are great bridge programs available.  The benefits are that there is slightly less competition, although there's still plenty.

More than 300 of the industry's leading national investors, REITs, banks, private equity firms, asset management firms and other institutions will join us as we explore the market conditions behind the trends at this year's RealShare National Investment & Finance, scheduled for Oct. 5 and 6 at the Roosevelt Hotel in New York City. Learn more.

Steady gains in the US economy have resulted in net positives for the multifamily sector—will this wave continue for the foreseeable future? What's driving development and capital flows? Join us at RealShare Apartments on October 19 & 20 for impactful information from the leaders in the National multifamily space. Learn more.

LOS ANGELES—Cap rates are hitting all-time lows. According to a new study from CBRE, millennials and baby boomers, paired with strong economic fundamentals, are driving multifamily cap rates down across the country with Los Angeles and San Francisco reporting the lowest averages. In the first half of 2016, the two cities had a 3.75% average multifamily cap rate, while San Jose, San Diego, Orange County and New York had cap rates averaging below 4%. To find out more about this downward trend, we sat down with Priscilla Nee, SVP at CBRE, for an exclusive interview.

GlobeSt.com: How are millennials and baby boomers playing a role in these record low cap rates? 

Priscilla Nee: Millennials are fueling the rent premium differential between renovated and non-renovated product.  Investors looking to capitalize on this understand that there is easily a minimum bump of 15%-20% on nicely renovated units.  This takes the attention away from the currently low cap rates, and places an emphasis, instead, on the post renovation, stabilized, yield.

GlobeSt.com: While cap rates are hitting record lows nationwide, why are Los Angeles and San Francisco seeing exceptionally low cap rates?

Nee: Risk versus reward, coupled with supply and demand.  Unless we run out of water, people want to be in California, especially the Los Angeles and San Francisco markets. The increasing number of tech jobs, the large and highly educated workforce and the density of Millennials congregating in a city such as LA is making already historically lower cap rate regions even more expensive.

GlobeSt.com: How are these record low cap rates affecting investors, especially buyers, in the L.A. and SF submarkets?

Nee: Most buyers are priced out of the market. Those who want to be competitive have had to redefine their investment parameters and concede to a lower preliminary yield.  It's definitely more challenging for the investors who don't understand, or believe in, the power of pushing rents to accept, so they end up on the sidelines.

GlobeSt.com: Can or will cap rates continue to decrease? What is your forecast?

Nee: Yes, I believe so, because the investors who are winning the deals today are looking more at stabilized yields than current cap rates.  As long as rents continue to increase, and money continues to be cheap and easily accessible, cap rates can continue to compress.  Furthermore, there has been an unprecedented influx of foreign capital flowing into the U.S., with more than $125 billion across all product types from 2015 through the end of the second quarter this year.  According to the latest CBRE research, the LA market has captured a significant amount of foreign capital, with more than 80 percent of cross-border capital flows into LA originating from Asia and the Middle East.  Our Global Investor Intentions Survey indicated that 82 percent of global investors plan on investing either the same or more in the coming years.  If you compare our low cap rates to the yields these foreign buyers are seeing at home in the same product type, our low cap rates and security are actually quite attractive.

GlobeSt.com: What is your advice to investors who are playing in this market? What are the benefits and the challenges of having cap rates this low?

Nee: Don't sweat the small stuff if you're buying location, especially if you're a long-term holder.  Get aggressive on your terms, shorten your due diligence period if you can do so without compromising your inspections,  make sure you're on the radar of the active agents in the markets you want to be if you're a buyer.  Go to market, if you're a seller.  The challenge is that deals don't make sense to most people, and low loan-to-value parameters require more capital to get into a deal, although there are great bridge programs available.  The benefits are that there is slightly less competition, although there's still plenty.

More than 300 of the industry's leading national investors, REITs, banks, private equity firms, asset management firms and other institutions will join us as we explore the market conditions behind the trends at this year's RealShare National Investment & Finance, scheduled for Oct. 5 and 6 at the Roosevelt Hotel in New York City. Learn more.

Steady gains in the US economy have resulted in net positives for the multifamily sector—will this wave continue for the foreseeable future? What's driving development and capital flows? Join us at RealShare Apartments on October 19 & 20 for impactful information from the leaders in the National multifamily space. Learn more.